Small business owners like you have a lot of responsibilities, and with responsibilities come the consequences of failing to meet them. As someone who employs staff, one of your most important duties to your staff members is to make sure they get paid on time and fairly for their work. Your payroll is a vital system for your business, and if something goes wrong with that system, the payroll risks can range from frustrated staff to legal trouble.
How Payroll Should Work
A payroll system is meant to be a smooth operation that occurs regularly, following the same steps each time. At the end of each pay cycle, you or whoever is responsible for calculating the pay determines each employee’s compensation. Hours should be recorded. Rates of pay should be used to determine each employee’s paycheck. Other benefits should be factored in. Taxes should be calculated and deducted, and then pay should be issued by whichever method is used, whether that’s paper checks, direct deposit, or any other agreed-on and permitted method.
Of course, this is how payroll should work in a perfect world. But since the world’s not perfect, there are payroll risks that can cause your business operations to go awry.
How Payroll Gets Messed Up
Since your payroll is a system that deals with money, some of the biggest payroll risks have to do with miscalculations. Miscalculations of employees’ hours or rates of pay can result in overpayment or underpayment, both of which can make employees irritated. Nobody likes to be underpaid, and employees can get frustrated if they’re told they have to return some of their paychecks due to no fault of their own.
A related risk to miscalculation (and often the cause of miscalculation) is improper record keeping. Inaccurate or missing records, particularly records of hours worked or rates of pay, can result in employees not receiving proper compensation. Not only does this lead to angry staff members, but it can also lead to legal trouble, including but not limited to fines and penalties, such as if you’re required to present your records to a federal, state, or local tax official. Not only do you need to record monetary compensation in payroll, but you also need to record the benefits you give your employees, such as stock options, gift card awards, and use of a company car. Finally, you also need to properly classify your employees in your records. Classification is directly related to determining reasonable pay for a given position, and incorrectly classifying an employee can result in under- or overpayment.
Finally, poor scheduling and over-reliance on one person can also create problems with payroll. If you rely on one person to handle your payroll, it can bring payroll to a stop if they take time off or require sick leave. Failing to issue payroll on time, for this or any other reason, can anger your staff, as well as cause them financial trouble if they need their paycheck by a certain time to pay their bills. Make sure more than one person can process your payroll.
How to Avoid Payroll Mistakes
There are a variety of steps you can take to mitigate and minimize payroll risks. Among the measures you can take are the following:
- Establish clear payroll policies.
- Evaluate your current payroll process.
- Automate your payroll process, integrating it with all the necessary systems in your business.
- Create a detailed payroll calendar.
- Keep track of the latest laws and regulations.
Following these steps can help avoid mistakes with your payroll. It can also mean a lot of work for you and your staff, but there is an alternative. Outsourcing your payroll to a third-party provider can ensure your payroll is handled by professionals who are experts in administering payroll. A well-researched payroll provider can provide your business with the services needed at an affordable price.